Fed officials split on rate cut size, minutes show

WASHINGTON (MarketWatch) -- Only a slim majority of the Federal Reserve's 12 district banks backed a half-percentage point cut in interest rates going into the central bank's September meeting, according to minutes of the discount rate meetings released Tuesday.

According to the minutes of the discount rate meetings, only 7 of the 12 banks supported a half-point reduction in the discount rate on Sept. 17. Four of the 12 banks favored a quarter-point reduction in the discount rate. One bank called for holding the discount rate steady.

The banks favoring the smaller rate cut were the districts of Atlanta, Chicago, Dallas and Richmond. The Federal Reserve Bank of Philadelphia voted to hold rates steady.

Presidents of these banks were considered hawks going into the Fed's September meeting. Many had given tough speeches about the dangers of "moral hazard," or bailing out investors who made foolish bets, because it would only encourage more foolish bets.

According to the minutes, the district banks in favor of a half-point rate cut cited increased downside risks to the real economy from the debt crisis.

"Most directors [favoring a half-point cut] believed that the recent tightening of credit conditions appeared likely to have contractionary effects on the economy going forward and that these effects could be significant, partly by intensifying the correction in the housing sector," the minutes said.

One factor in their argument was the Labor Department's initial report of a surprising a decline of 4,000 jobs in August.

Some of the bankers argued that this was an early sign of a slowdown.

The government subsequently revised its August unemployment report to a gain of 89,000 jobs. See full story.

Bankers favoring a smaller cut were also concerned about near-term prospects and "generally agreed that inflation risks had diminished a little and risks to growth had increased." But they thought a quarter-point cut was appropriate.

Following the closed-door discussion on Sept. 18, the policy-setting Federal Open Market Committee's vote to cut rates by a half-point was unanimous.

None of the five banks that favored a smaller cut or holding rates steady were voting members at the meeting.

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